Understanding Downsizer Contributions
Owning your own home is the great Australian dream. Faced with housing shortages and escalating rents, having a personal sanctuary can spell the difference between a comfortable, secure retirement and one with challenges and uncertainty. If you're contemplating a move to a smaller, or more conveniently located residence for your retirement years, selling your family home could be a great way to unlock the equity you've diligently built over the years, whilst giving your superannuation a substantial boost.
The government is eager to assist by offering enticing incentives. It recognises that helping older Australians 'right size' their homes for retirement can also facilitate the availability of larger homes for young families aspiring to enter the housing market. Downsizing can be a significant step, especially for retirees or those nearing retirement. In Australia, the concept of ‘downsizer contributions’ offers an avenue to bolster superannuation funds, and potentially provide a financial buffer for the future.
What is a ‘Downsizer Contribution’?
The ‘downsizer contribution’ was introduced by the Australian government in 2018 to encourage older Australians to downsize their homes, freeing up larger properties for younger families while allowing retirees to increase their superannuation balance. Essentially, it enables eligible individuals to contribute some of the proceeds from the sale of their primary residence into their superannuation fund.
Why Was the Downsizer Contribution Introduced?
The primary objective behind the downsizer initiative was twofold:
?Eligibility Criteria for Downsizer Contributions?
Initially set at 65, the eligible age for making a downsizer contribution has been progressively lowered. As of now, individuals aged 55 and over can take advantage of this scheme.
To qualify, the home being sold must have been owned for at least ten years and should be eligible for a full or partial main residence CGT exemption. Investment properties or secondary homes do not qualify unless they were the primary residence at some point and be eligible for a full or partial main residence CGT exemption.
Eligible individuals can contribute up to $300,000, with the limit being the lesser of $300,000 and the gross actual sale proceeds of the home. For couples, this means a combined total of up to $600,000. These contributions are classified as non-concessional and do not count towards other contribution caps.
The contribution must be made within 90 days of the settlement of the property, unless you receive an extension from the ATO, using the ATO’s form when the contribution is made.
Steps to Make a Downsizer Contribution
No upper Age Limit
Unlike other superannuation contributions which have upper age limits, the downsizer contribution can be made by those who are over 55 years of age at the time of the contribution, even beyond 75 years old.
Common Situations:
Scenario 1: Full Contribution
A couple sells their home for $1.5 million and buys a small unit for $800,000. Each spouse can contribute $300,000 downsizer contribution towards their super.
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Scenario 2: Partial Contribution
Consider a couple who sells their home for $1.5 million and buys a smaller unit for $800,000. The 55-year-old partner can make a $300,000 downsizer contribution, while the 54-year-old can’t. Any remaining funds could be added as non-concessional contributions to maximise their superannuation benefits, depending on other contributions made.
Scenario 3: Mixed Property Use
A client owned and lived in a home for a few years before renting it out. Despite its current status as an investment property, it still qualifies for a downsizer contribution because it was their primary residence at one point, and are eligible for at least a partial CGT exemption. This scenario highlights the flexibility within the downsizer rules, allowing for strategic financial planning.
Scenario 4: Contribution Limit
A couple sells their home for $400,000. The maximum contribution both of them can make is $400,000 in total. This means they can choose to contribute half ($200,000) each, or split it – for example, $300,000 for one and $100,000 for another.
Scenario 5: Home under one spouse
A couple sells their home for $1.2 million. However, only one spouse is on the title. Both partners meet all the other requirements, therefore both of them can each make a downsizer contribution of up to $300,000.
Implications for Pensioners
It is worth keeping in mind that for individuals that take the age pension, downsizer contributions can impact payments. Increased superannuation balances are used for assessing age pension and could potentially reduce pension payments. The trade-off, however, is having a larger superannuation fund to draw from, which may provide greater financial security in the long term.
Implications on TSB / TBC
Downsizer contributions count towards a member’s total superannuation balance (TSB) at the end of the financial year that the downsizer contribution is made and is counted towards your transfer balance cap (TBC) if the contribution is used to commence a retirement pension. This cap limits the amount you can move from your accumulation account into the tax-free retirement phase to start a super income stream (or pension).
Final Thoughts
The downsizer contribution scheme presents a valuable opportunity for Australians aged 55 and over to enhance their superannuation savings. By understanding the eligibility criteria, contribution limits, and strategic implications, individuals can make use of this booster to meet retirement goals. As with any financial decision, seeking professional advice ensures that you maximise the benefits and navigate any potential pitfalls effectively.
For personalised advice and to explore how downsizer contributions can fit into your retirement strategy, consider contacting us on 03 9268 1118 or [email protected] to discuss our services further.
The information presented is solely for educational purposes and is of a general nature, with no consideration for your specific objectives, financial position, or requirements. It is not intended to replace professional financial advice, and you should evaluate its suitability in consideration of your individual circumstances.
Alex, Anu and the team.
This report has been prepared by Alex Henderson & Anu Souvannavong
Shaw and Partners, Morrissey Wealth Management
Level 36, 120 Collins Street
Melbourne VIC 3000
Morrissey Wealth Management (Authorised Representative Number 268130) is a Corporate Authorised Representative of Shaw and Partners Limited (AFSL 236048) (ABN 24 003 221 583)
This market update is issued by Morrissey Wealth Management an authorised representative (no. 268130) (the “Morrissey Group”) of Shaw and Partners Limited AFSL 236048. This market update is confidential and may be privileged. Unauthorised use, copying or distribution of any part of this document including attachments is prohibited.? The views expressed are personal to the Morrissey Group and do not necessarily reflect the views of Shaw and Partners. This market update has been prepared without taking into consideration any investor's financial situations, objectives or needs. Accordingly, before acting on the advice in this document, if any, you should consider its appropriateness to your financial situation, objectives and needs. Every reasonable effort has been made to ensure the information provided in this document is correct, but we cannot make any representation nor warranty as to the accuracy, completeness or currency of that information. To the extent permissible by law, no responsibility for any errors or misstatements is taken, negligent or otherwise.? Shaw or its authorised representatives may also receive fees or brokerage from dealing in financial products, see Shaw’s Financial Services Guide for information about the services offered by Shaw available at https://www.shawandpartners.com.au/.